NeuroMetrix(NURO) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents unaudited interim financial statements and management's discussion and analysis Item 1. Financial Statements Unaudited interim financial statements reveal an accumulated deficit and raise going concern doubts Balance Sheets Balance Sheets show changes in assets, liabilities, and equity, highlighting increased cash and equity | Metric | June 30, 2020 ($) | December 31, 2019 ($) | Change ($) | % Change | | :-------------------------- | :------------ | :---------------- | :----- | :------- | | Cash and cash equivalents | $5,434,983 | $3,126,206 | $2,308,777 | 73.9% | | Total current assets | $7,403,682 | $5,430,814 | $1,972,868 | 36.3% | | Total assets | $8,605,528 | $6,893,686 | $1,711,842 | 24.8% | | Total current liabilities | $2,418,784 | $3,446,778 | $(1,027,994) | -29.8% | | Total liabilities | $3,116,912 | $4,363,452 | $(1,246,540) | -28.6% | | Total stockholders' equity | $5,488,616 | $2,530,234 | $2,958,382 | 116.9% | Statements of Operations Statements of Operations detail revenue, expenses, and net loss for quarterly and six-month periods Quarterly Performance (Q2 2020 vs Q2 2019) | Metric | Q2 2020 ($) | Q2 2019 ($) | Change ($) | % Change | | :------------------------------------------ | :------------ | :------------ | :------------ | :------- | | Revenues | $1,359,979 | $2,354,683 | $(994,704) | -42.2% | | Cost of revenues | $495,086 | $3,143,787 | $(2,648,701) | -84.3% | | Gross profit (loss) | $864,893 | $(789,104) | $1,653,997 | -209.6% | | Total operating expenses | $1,717,888 | $3,973,425 | $(2,255,537) | -56.8% | | Loss from operations | $(852,995) | $(4,762,529) | $3,909,534 | -82.1% | | Collaboration income | $0 | $1,381,818 | $(1,381,818) | -100.0% | | Net loss | $(851,944) | $(3,362,191) | $2,510,247 | -74.6% | | Net loss per common share (basic and diluted) | $(0.28) | $(3.72) | $3.44 | -92.5% | Six Months Performance (6M 2020 vs 6M 2019) | Metric | 6M 2020 ($) | 6M 2019 ($) | Change ($) | % Change | | :------------------------------------------ | :------------ | :------------ | :------------ | :------- | | Revenues | $3,532,015 | $5,477,618 | $(1,945,603) | -35.5% | | Cost of revenues | $1,115,276 | $5,468,018 | $(4,352,742) | -79.6% | | Gross profit (loss) | $2,416,739 | $9,600 | $2,407,139 | 25074.4% | | Total operating expenses | $3,927,603 | $8,473,284 | $(4,545,681) | -53.6% | | Loss from operations | $(1,510,864) | $(8,463,684) | $6,952,820 | -82.1% | | Collaboration income | $0 | $7,116,667 | $(7,116,667) | -100.0% | | Net loss | $(1,509,315) | $(1,311,684) | $(197,631) | 15.1% | | Net loss per common share (basic and diluted) | $(0.68) | $(1.56) | $0.88 | -56.4% | Statement of Changes in Stockholders' Equity This statement outlines changes in stockholders' equity, driven by common stock issuance and net losses - Total stockholders' equity increased from $2,530,234 at December 31, 2019, to $5,488,616 at June 30, 2020, primarily due to the issuance of common stock under an at-the-market offering, which generated $3,689,974 in proceeds during Q2 2020, and stock-based compensation expense, partially offset by net losses[16][17] - Common stock shares outstanding significantly increased from 1,400,674 at December 31, 2019, to 3,784,657 at June 30, 2020, largely due to the at-the-market offering[16][17] Statements of Cash Flows Statements of Cash Flows present cash movements from operating, investing, and financing activities | Cash Flow Activity | 6 Months Ended June 30, 2020 ($) | 6 Months Ended June 30, 2019 ($) | | :----------------------------------- | :--------------------------- | :--------------------------- | | Net cash used in operating activities | $(1,831,760) | $(1,822,281) | | Net cash used in investing activities | $(10,500) | $(7,587) | | Net cash provided by financing activities | $4,151,037 | $7,497 | | Net increase (decrease) in cash and cash equivalents | $2,308,777 | $(1,822,371) | | Cash and cash equivalents, end of period | $5,434,983 | $4,958,058 | - The significant increase in cash and cash equivalents in 2020 was primarily driven by $4.15 million in net proceeds from the issuance of common stock through an at-the-market offering, offsetting cash used in operating activities[19] Notes to Unaudited Financial Statements Detailed explanations and disclosures support the unaudited interim financial statements 1. Business and Basis of Presentation Describes business, products, and financial statement basis, including going concern issues - NeuroMetrix, Inc. develops and manufactures diagnostic and therapeutic neurostimulation medical devices, including DPNCheck® for peripheral neuropathies, ADVANCE™ for nerve conduction studies, and Quell® 2.0 for chronic pain management[21] - The Company has reported recurring losses and negative operating cash flows, with an accumulated deficit of $196.3 million as of June 30, 2020, raising substantial doubt about its ability to continue as a going concern beyond Q3 2021[22] - The COVID-19 pandemic adversely affected product sales in Q1 and Q2 2020, potentially accelerating the consumption of capital resources and impacting the ability to obtain parts, staff production, and generate future revenues[23] - The Company plans to seek additional funding through public/private financing, collaborative arrangements, or debt, but faces risks of dilution for existing stockholders or unfavorable terms[24] Revenues (Note) Details revenue recognition policies and significant customer concentration - Revenue is recognized when contractual performance obligations are satisfied and control of the product is transferred to the customer, net of estimated returns[26] - Customer concentration: Three customers accounted for 42% of total revenues in Q2 2020, and one customer for 20% in 6M 2020. Four customers accounted for 89% of accounts receivable as of June 30, 2020[28] Collaboration income (Note) Explains the significant decrease in collaboration income for the current periods - Collaboration income, recognized within Other income, was $0 for both the quarter and six months ended June 30, 2020, a 100% decrease from $1,381,818 and $7,116,667 in the comparable 2019 periods, respectively[29] Stock-based Compensation (Note) Provides details on unrecognized stock-based compensation costs and their recognition period - Unrecognized stock-based compensation cost was $270,740 as of June 30, 2020, expected to be recognized over a weighted-average period of 0.5 years[30] 3. Net Loss Per Common Share Presents basic and diluted net loss per common share and weighted average shares outstanding | Metric | Q2 2020 ($) | Q2 2019 ($) | 6M 2020 ($) | 6M 2019 ($) | | :---------------------------------------------------- | :------ | :------ | :------ | :------ | | Net loss per common share (basic and diluted) | $(0.28) | $(3.72) | $(0.68) | $(1.56) | | Weighted average number of common shares outstanding, basic (shares) | 3,014,523 | 904,824 | 2,235,874 | 839,625 | - Potentially dilutive common stock equivalents (options, warrants, convertible preferred stock) were excluded from diluted EPS calculation for all periods as their effect was anti-dilutive[33] 4. Inventories Details the composition of inventories, including purchased components and finished goods | Inventory Component | June 30, 2020 ($) | December 31, 2019 ($) | | :------------------ | :------------ | :---------------- | | Purchased components | $775,463 | $720,209 | | Finished goods | $416,535 | $443,505 | | Total Inventories | $1,191,998 | $1,163,714 | 5. Accrued Expenses and Compensation Provides a breakdown of accrued expenses and compensation by category | Category | June 30, 2020 ($) | December 31, 2019 ($) | | :------------------------ | :------------ | :---------------- | | Technology fees | $450,000 | $450,000 | | Professional services | $293,000 | $454,000 | | Compensation | $111,997 | $62,322 | | Advertising and promotion | $26,000 | $68,000 | | Warranty | $68,700 | $75,300 | | Other | $86,226 | $333,952 | | Total | $1,035,923 | $1,443,574 | 6. Leases Discusses lease accounting, including an impairment reserve for an inactive facility - The Company recorded an impairment reserve of $604,000 against the right-of-use asset for its inactive Waltham facility, which had not been sublet as of June 30, 2020[36][38] - Total recorded rent expense for the six months ended June 30, 2020, was $333,809, slightly up from $332,049 in the prior year[37] 7. Business Restructuring Outlines the Q2 2019 business restructuring, its costs, and related impairment charges - A business restructuring in Q2 2019 aimed to reduce operating costs, consolidate operations, and reduce headcount. The total 2019 restructuring charge was $2.3 million[38] - Impairment charges related to the idle Waltham facility were $117,000 for Q2 2020 and $204,000 for the six months ended June 30, 2020[38] | Restructuring Obligation | June 30, 2020 ($) | | :----------------------- | :------------ | | Severance obligations | $0 | | Relocation costs | $0 | | Impairment charge for idle facility | $400,000 | | Balance - June 30, 2020 | $400,000 | 8. Fair Value Measurements Describes the fair value measurement hierarchy for assets and liabilities - All Company assets and liabilities measured at fair value, specifically cash equivalents, utilize Level 1 inputs (quoted prices in active markets for identical assets)[41][42] 9. Credit Facility and Paycheck Protection Program Loan Details the expiration of the credit facility and the repayment of the PPP loan - The Company's Credit Facility expired on April 30, 2020, and was not renewed, though letters of credit remain outstanding and secured by cash balances[43] - A $773,200 Paycheck Protection Program (PPP) loan received on April 28, 2020, was fully repaid on May 6, 2020, following new SBA guidance on eligibility[44] 10. Stockholders' Equity Explains changes in stockholders' equity, primarily from common stock issuance - During the six months ended June 30, 2020, the Company issued 2,348,619 shares of common stock under an at-the-market offering for net proceeds of $4,143,431[46] - Additional common stock was issued to settle compensation obligations (31,000 shares for $43,751) and under an employee stock purchase plan (4,364 shares for $7,606)[47] 11. Reverse Stock Split Describes the 1-for-10 reverse stock split effected in November 2019 - On November 18, 2019, the Company effected a 1-for-10 reverse stock split of its Common Stock, retroactively adjusted in financial statements[49] 12. Commitments and Contingencies Details the settlement of the FTC investigation regarding Quell® product claims - The Federal Trade Commission (FTC) investigation regarding Quell® product claims was settled in March 2020. The Company and CEO agreed to advertising modifications and a $4 million payment by the CEO, with the Company pledging future commercial milestone payments from a collaboration agreement[50] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's perspective on financial performance, liquidity, and future funding needs, including COVID-19 impacts Overview Introduces the company's products, market strategies, and potential future monetization plans - NeuroMetrix develops and commercializes non-invasive neurostimulation and digital medicine products, with core expertise in biomedical engineering[52] - The Company's principal product lines are point-of-care neuropathy diagnostic tests (DPNCheck, ADVANCE) and wearable neurostimulation devices (Quell)[52][53] - DPNCheck provides rapid, low-cost quantitative tests for peripheral nerve disease, with a next-generation version forecast for late 2020 or early 2021[53] - Quell, an app-enabled wearable for chronic pain, has restructured its commercial model to achieve a positive net operating contribution, with most sales direct-to-consumer[57] - The collaboration with GlaxoSmithKline (GSK) on Quell for markets outside the U.S. continues, having delivered approximately $20.5 million in development milestones[59] - The Company may consider monetizing either product line, in whole or in part, in the future[60] Results of Operations Compares financial results for the quarter and six months ended June 30, 2020, versus 2019 Comparison of Quarters Ended June 30, 2020 and 2019 Details quarterly revenue, gross margin, operating expenses, and collaboration income changes Revenues (Q2 2020 vs Q2 2019) | Product Line | Q2 2020 (in millions $) | Q2 2019 (in millions $) | Change (in millions $) | % Change | | :----------- | :-------------------- | :-------------------- | :------------------- | :------- | | Total Revenues | $1.4 | $2.4 | $(1.0) | -42.2% | | Quell | $0.4 | $0.8 | $(0.4) | -50.0% | | DPNCheck | $0.8 | $1.2 | $(0.4) | -33.3% | | ADVANCE | $0.1 | $0.3 | $(0.2) | -66.7% | - Gross margin improved significantly to 63.6% in Q2 2020 from (33.5)% in Q2 2019, primarily due to the absence of a $1.9 million inventory write-down for Quell Classic in 2020 and improved profitability of Quell sales[62] Operating Expenses (Q2 2020 vs Q2 2019) | Expense Category | Q2 2020 (in millions $) | Q2 2019 (in millions $) | Change (in millions $) | % Change | | :-------------------- | :-------------------- | :-------------------- | :------------------- | :------- | | Research and development | $0.66 | $1.03 | $(0.37) | -36.2% | | Sales and marketing | $0.38 | $1.37 | $(0.99) | -72.4% | | General and administrative | $0.68 | $1.56 | $(0.88) | -56.6% | | Total operating expenses | $1.72 | $3.97 | $(2.25) | -56.8% | - Collaboration income decreased by 100% to $0 in Q2 2020 from $1.38 million in Q2 2019, as it includes development milestones funded by GSK[67] Comparison of Six Months Ended June 30, 2020 and 2019 Details six-month revenue, gross margin, operating expenses, and collaboration income changes Revenues (6M 2020 vs 6M 2019) | Product Line | 6M 2020 (in millions $) | 6M 2019 (in millions $) | Change (in millions $) | % Change | | :----------- | :-------------------- | :-------------------- | :------------------- | :------- | | Total Revenues | $3.53 | $5.48 | $(1.95) | -35.5% | | Quell | $1.0 | $2.5 | $(1.5) | -59.1% | | DPNCheck | $2.2 | $2.4 | $(0.2) | -8.3% | | ADVANCE | $0.4 | $0.6 | $(0.2) | -33.3% | - Gross profit margin increased significantly to 68.4% in 6M 2020 from 0.2% in 6M 2019, primarily due to the absence of a $2.6 million inventory write-down in 2020 and improved Quell sales profitability[70] Operating Expenses (6M 2020 vs 6M 2019) | Expense Category | 6M 2020 (in millions $) | 6M 2019 (in millions $) | Change (in millions $) | % Change | | :-------------------- | :-------------------- | :-------------------- | :------------------- | :------- | | Research and development | $1.19 | $1.89 | $(0.70) | -36.8% | | Sales and marketing | $0.80 | $3.40 | $(2.60) | -76.4% | | General and administrative | $1.93 | $3.18 | $(1.25) | -39.4% | | Total operating expenses | $3.93 | $8.47 | $(4.54) | -53.6% | - Collaboration income decreased by 100% to $0 in 6M 2020 from $7.12 million in 6M 2019[75] Liquidity and Capital Resources Discusses cash position, going concern issues, and future funding strategies amidst the COVID-19 pandemic - Cash and cash equivalents increased by 73.9% to $5.4 million at June 30, 2020, from $3.1 million at December 31, 2019, primarily due to $4.1 million in net proceeds from common stock sales[77][78] - The Company reported recurring losses and negative operating cash flows, raising substantial doubt about its ability to continue as a going concern beyond Q3 2021, necessitating additional funding[82] - The COVID-19 pandemic continues to pose significant challenges, potentially accelerating capital consumption due to decreased sales, supply chain disruptions, and changes in operating expenses[83] - The Company may seek additional funding through public/private financing, collaborations, or debt, but warns of potential dilution for existing stockholders or unfavorable terms[83] Working Capital Metrics | Metric | Q2 2020 | Q2 2019 | FY 2019 | | :---------------------- | :------ | :------ | :------ | | Days sales outstanding (days) | 26 | 33 | 27 | | Inventory turnover rate (times per year) | 1.7 | 5.5 | 3.5 | Off-Balance Sheet Arrangements, Contractual Obligation and Contingent Liabilities and Commitments Confirms the absence of off-balance sheet financing arrangements as of June 30, 2020 - As of June 30, 2020, the Company did not have any off-balance sheet financing arrangements[84] Recent Accounting Pronouncements Outlines the adoption of ASU 2016-02, Leases (Topic 842), and its financial impact - The Company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, using the modified retrospective method, resulting in an approximate $1.9 million increase to long-term assets and total liabilities[85] Cautionary Note Regarding Forward-Looking Statements Advises on inherent risks and uncertainties associated with forward-looking statements in the report - The report contains forward-looking statements regarding future expectations, operating losses, revenues, expenses, liquidity, capital needs, COVID-19 impact, product development, regulatory approvals, and market acceptance, which are subject to risks and uncertainties[86] Item 3. Quantitative and Qualitative Disclosures About Market Risk Addresses market risk exposure, primarily interest rate risk, and investment strategy - The Company does not use derivative financial instruments and has no foreign exchange contracts[87] - Investments are primarily in cash equivalents and short-term instruments (maturity of 12 months or less) to preserve principal and maintain liquidity[87] - A hypothetical 10% change in interest rates is not expected to have a material impact on the fair value of the investment portfolio or interest income[87] Item 4. Controls and Procedures Confirms effective disclosure controls and procedures and no material internal control changes - Disclosure controls and procedures were evaluated as effective as of June 30, 2020, ensuring timely and accurate reporting of required information[88] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020[89] PART II – OTHER INFORMATION Covers legal proceedings, risk factors, equity sales, defaults, and other required disclosures Item 1. Legal Proceedings No material legal proceedings are expected to significantly impact the company's financial position - The Company is not currently involved in any material legal proceedings[90] - No expected significant impact on financial position from potential ordinary course legal proceedings[90] Item 1A. Risk Factors Updated risk factors primarily relate to the adverse impacts of the COVID-19 pandemic on operations - No material changes to risk factors from the 2019 Form 10-K, except for updates regarding the COVID-19 pandemic[91] - The COVID-19 pandemic has adversely impacted product orders and could continue to affect business operations, including restrictions, diversion of healthcare resources, supply chain disruptions, employee limitations, and distribution channel issues[92][93][97] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported during the period - No unregistered sales of equity securities or use of proceeds[94] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - No defaults upon senior securities[95] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Mine Safety Disclosures are not applicable to the Company[96] Item 5. Other Information No other information required under this item was reported - No other information to report[97] Item 6. Exhibits Lists exhibits filed as part of the quarterly report, including certifications and XBRL financial statements - Exhibits include certifications of principal executive and financial officers (31.1, 31.2, 32) and XBRL formatted financial statements (101)[104] Signatures Contains official signatures of the company's principal executive and financial officers - The report was signed on July 23, 2020, by Shai N. Gozani, M.D., Ph. D., Chairman, President and Chief Executive Officer, and Thomas T. Higgins, Senior Vice President, Chief Financial Officer and Treasurer[102]